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95-62 SEC Approves New NASD Mediation Rules That Take Effect August 1, 1995

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Executive Summary

On July 19, 1995, the Securities and Exchange Commission (SEC) approved new NASD Mediation Rules (Rules) to take effect August 1, 1995. The new Rules provide a structure for the NASD to administer a Mediation Program as an informal and less adversarial alternative to arbitration for the resolution of securities-related disputes between and among investors and securities industry professionals.

Generally, mediation is quicker and less expensive than arbitration or litigation, and it gives the disputing parties a chance to work out their own solutions with the help of a trained and impartial intermediary. Through mediation, the parties involved retain complete control of the process, the costs, and the outcome of the effort— the impartial mediator has no authority to impose decisions or settlement on the parties. Mediation is voluntary and non-binding until the parties execute a settlement to which they both or all agree, and parties do not give up their rights to arbitrate the same matter if the mediation efforts are unsuccessful. Under the Rules, all matters eligible for arbitration under the NASD Code of Arbitration will be eligible for the Mediation Program. The NASD plans to solicit participation in the Mediation Program by approaching parties to arbitration cases and exploring the merits of mediation to determine whether this option might meet their needs. Standard administrative fees for the mediation of a dispute will be waived for cases that are pending arbitration. The text of the new Rules follows this Notice.

Background

The NASD is the premier arbitration forum for the securities industry. More than 5,500 cases filed with the NASD in calendar year 1994 represented 86 percent of all arbitrations filed with self-regulatory organizations that year and 82 percent of all securities arbitrations filed in all forums combined (including the American Arbitration Association). The volume of arbitration cases has grown dramatically since the U.S. Supreme Court recognized in 1987 the enforceability of predispute arbitration agreements with respect to securities law claims. The NASD hopes that a mediation program will help to relieve the weight of this growing number of arbitration cases.

While volume has grown, the arbitration process has become more complex, costly, and time-consuming— bearing an increased resemblance to court litigation. This has renewed interest in alternative forms of dispute resolution that would recapture the informal, low-cost, time-saving advantages that arbitration once provided. The NASD believes that mediation can meet this need.

The goal of mediation is to permit the disputing parties to explore and work out their own settlements with complete control over the process and without resorting to adversarial adjudication. The NASD believes this can save investors and member firms time and money, and the relationships between the disputing parties can often be saved. Additionally, if the dispute is not fully resolved in mediation, the process is still valuable for narrowing the issues of conflict and finding common grounds, resulting in a faster, simpler arbitration.

The NASD is adopting a new Part IV to the Code of Arbitration Procedure (Code) setting forth rules to govern the mediation of disputes administered by the NASD. The NASD is also adopting several other amendments to the Code relating to fees for mediations and the records of a mediation proceeding.

Description Of Mediation Rules

NASD Notice to Members 95-01 (January 1995) requested comment on proposed Mediation Rules. The new Mediation Rules were revised in response to the comment letters received and have been structured, by subject, as follows:

  • General Scope and Authority;

  • Submission of Eligible Matters;

  • Pending Arbitration Proceedings;

  • Mediator Selection;

  • Limitation of Liability for Mediators and the NASD; and

  • Ground Rules.

The Mediation Rules will be incorporated into the Code as a new Part IV, with provisions corresponding to the structure referred to above, and numbered consecutively with the current provisions of the Code. This structure permits reference in the Mediation Rules to the subject matter jurisdiction of the Code and the arbitrator disclosure provisions as they apply to mediators.

Record Of Sessions

Section 37 of the Code is amended to add a new paragraph (b) to prohibit the keeping of a verbatim record of any mediation session conducted pursuant to the Rules. The NASD believes that a verbatim record is not consistent with the goals or methods of mediation; a free-flowing and confidential exchange of views, opinions, proposals, and admissions.

Fees

Sections 43 and 44 of the Code are amended to include mediation fees. Under the amendments adding Subsections 43(i) and 44(j) mediations will be administered at no charge to the parties when there is an arbitration matter pending before the Association. When there is no arbitration pending with the Association, under Subsection 43(i) the NASD will charge each party $150 for the mediation of a matter involving public customers and, under Subsection 44(j), the NASD will charge each party $250 for the mediation of a matter involving industry parties.

However, even when there is no charge for administering the mediation, Subsections 43(j) and 44(k) provide that the parties will pay all of the mediator's charges, including travel and other expenses. The NASD will set forth the mediator's charges in the Submission Agreement and they will be apportioned equally among the parties, unless they agree otherwise. The NASD will also make an initial estimate of the mediator's charges based on the anticipated length of the session or sessions. The parties will be required to deposit their proportional share of such estimated charges with the NASD before the first mediation session.

The NASD's standard mediator charges will be $150 per hour, although the parties may agree to pay different charges for a particular mediator. While the NASD intends to make its best efforts to make mediators available at the specified hourly rate, some qualified mediators may decline to serve unless compensated at a higher rate.

The fees will be assessed for each matter submitted to mediation. Pursuant to Section 51, discussed below, a matter is deemed submitted to mediation when the Director of Mediation has received an executed mediation Submission Agreement from all parties.1

Finally, the NASD will assess the mediator's hourly fee for joint sessions and separate sessions on the basis of each half hour or portion thereof. The mediator's hourly rate for separate meetings will be apportioned equally among all parties without regard to the actual amount of time each party spent with the mediator. The NASD believes that all parties benefit equally from the mediator's efforts in meeting with each party, even if the mediator spends more time with one than the other.

General Scope And Authority

New Section 50 establishes the scope and authority of the Rules. Section 50 provides that the Rules apply to mediations administered by the Association and calls for the designation of a Director of Mediation to administer mediations. Section 50 also specifies that the Director of Mediation will consult the National Arbitration Committee (Committee) on the administration of the Mediation Program and the Committee, as necessary, may make recommendations concerning the administration of the Mediation Program to the Director and recommend amendments to the Rules to the Board. Finally, Section 50 states that neither any mediator nor the NASD shall have the authority to compel a party to submit to mediation or to settle a matter. This last provision is intended to clarify the voluntary nature of mediation.2

Submission Of Eligible Matters

New Section 51 provides that any matter, or part of a matter (such as procedural issues), eligible for arbitration under the Code may be mediated. Any uncertainty about the eligibility of a matter for mediation will be resolved by the Director. Section 51 also states that a matter will be deemed submitted when the Director has received an executed mediation Submission Agreement from each party. The submission of a matter triggers the obligation to pay applicable fees and initiates the NASD's activities in finding a mediator and making arrangements for facilities for the mediation.

The NASD anticipates that indications of interest in mediation will be solicited by the Director, as well as expressed informally by parties. When an indication of interest is expressed, the Director will seek commitments to participate from other parties. Once those commitments are obtained, oral or written, the Director will forward a mediation Submission Agreement to the parties for execution.

Pending Arbitration Proceedings

New Section 52 provides that any arbitration pending at the time of a mediation will not be stayed or delayed unless the parties agree. The NASD believes this provision is important to prevent the use of mediation as a delaying tactic.

Mediator Selection

New Section 53 provides for the appointment of mediators and permits the parties to select a mediator from a list supplied by the Director, or to obtain, on their own, a non-NASD mediator. If the parties do not act to select a mediator, the Director will assign a mediator. The parties will also be provided with information relating to the mediator's employment, education, and professional background, as well as information on the mediator's experience, training, and credentials as a mediator. Section 53 also requires mediators to comply with the same background disclosure requirements as arbitrators.

Finally, Subsection 53(c) prohibits a mediator from serving as an arbitrator or from representing any party to a mediation in any subsequent arbitration proceeding relating to the subject matter of the mediation. The NASD believes that mediators, having served as a neutral in a position of trust and confidence with the parties, should not be permitted to serve as an arbitrator or as an advocate of one party with respect to matters that he or she has knowledge of due to interaction with both parties. The NASD also believes that state law, attorney codes of ethics, and mediator codes of conduct3 provide sufficient protection for parties in judicial forums.

Limitation Of Liability For Mediators And The NASD

New Section 54 limits the liability of mediators, the Association, and its employees, for any act or omission in connection with a mediation administered by the NASD under the Rules.

Ground Rules

New Section 55 establishes Ground Rules for mediation. Subsection 55(a) describes standard Ground Rules governing mediations and permits the parties to amend any of the Ground Rules at any time. The Subsection also provides that the Ground Rules are intended to be standards of conduct for the parties and the mediation. The NASD intends that the parties should feel free to tailor the Ground Rules to meet their needs.

Subsection 55(b) states that mediation is voluntary and that parties may withdraw from a mediation at any time before executing a settlement agreement by giving written notice of withdrawal to the mediator, the other parties, and the Director. This provision clarifies that, while the goal of mediation is to explore and settle outstanding disputes, if possible, the Rules are process oriented, not results oriented. The NASD does not intend that any party will be subject to any compulsion or coercion to come to a particular conclusion of a mediation. The process is completely voluntary and any party may withdraw from a mediation for any reason. If at any time a party feels that continuing with a mediation is not in their interests, he or she is free to terminate the mediation.

Subsection 55(c) establishes that the mediator's role is to act as a neutral, impartial facilitator, without authority to impose decisions or a settlement on the parties.

Subsection 55(d) provides that the parties and their representatives meet jointly with the mediator, in person or by conference call as determined by the mediator or by mutual agreement of the parties. The mediator will facilitate through joint sessions, caucuses, and/or other means discussions between the parties on the subject matter of the mediation.

Subsection 55(d) also provides that the mediator will determine the procedure for the mediation and the parties agree to cooperate with the mediator in conducting the mediation expeditiously, to make reasonable efforts to be available for mediation sessions, and to be represented at all sessions, in person or by someone with authority to settle the matter. This Subsection is to ensure that common obstacles to expeditious, effective mediation are avoided and sets forth rules that will discourage dilatory conduct and prevent gamesmanship. Parties failing to adhere to these standards send a strong signal that they are not interested in mediating in good faith.

Subsection 55(e) permits the mediator to meet with and communicate separately with each party, provided the mediator notifies the other parties. This permits the mediator to take steps to keep the mediation on track, if necessary, by initiating separate communications. These private caucuses allow the mediator to explore candidly each party's underlying interests and the strengths and weaknesses of their positions; however, the mediator will not disclose confidential information in violation of the confidentiality provisions. The mediator cannot disclose one party's confidential information to another party without authorization, see Subsection 55(g), below.

Subsection 55(f) describes the goal of mediation—to negotiate a settlement in good faith. The Subsection also permits direct negotiations between the parties outside of the mediation process.

Subsection 55(g) makes mediation private and confidential. The parties and the mediator are obligated not to disclose or otherwise communicate anything disclosed during the mediation in any other proceeding, unless authorized by all other parties involved in the mediation. Disclosure is permitted if compelled by law, which provides for situations where a party is subpoenaed or where there are regulatory requirements, such as the disclosures required in Form U-4 or under Article IV, Section 5 of the Rules of Fair Practice.

The fact that a mediation occurred is not confidential. The confidentiality provisions do not shield from disclosure information the Association or other regulatory authority would be entitled to obtain or examine in the exercise of its regulatory responsibilities. Thus, a party cannot refuse to disclose information to the NASD or an opposing party in civil litigation under the confidentiality clause by disclosing the information during the course of a mediation and then claiming that it is confidential. The mediator also cannot disclose one party's confidential information to another party without authorization.

While the proposed mediation rules are process oriented, the NASD expects that mediation will often settle a dispute. At the conclusion of a mediation where the parties have agreed to a settlement, the parties will be responsible for a written agreement that effectuates their mutual agreement reached in mediation.

Direct questions about this Notice to Kenneth Andrichik, Director of Mediation, at (212) 858-4400.


1 The NASD is developing a standard form mediation Submission Agreement containing terms essential to the NASD. A copy of the Submission Agreement will be provided to all parties.

2 The NASD will solicit participation in mediation by approaching parties to arbitration cases to advise them about mediation, explain the program and its merits, and explore whether mediation might meet the needs of the parties. The NASD believes an outreach program such as this will increase the mediation use and reduce the number of cases going to hearing.

3 The American Bar Association (ABA) has draft mediator standards of conduct under consideration. It is anticipated that the draft standards will be approved by the ABA at its next meeting. Draft Standard III states in pertinent part that "[w]ithout the consent of all parties, a mediator shall not subsequently establish a professional relationship with one of the parties in a related matter, or in an unrelated matter under circumstances which would raise legitimate questions about the integrity of the mediation process."


Text Of Amendments To Code Of Arbitration Procedure

(Note: New text is underlined.)

CODE OF ARBITRATION PROCEDURE

Sec. 1 through 36 No change.

Record of Proceedings

Sec. 37.

(a) A verbatim record by stenographic reporter or tape recording of all arbitration hearings shall be kept. If a party or parties to a dispute elect to have the record transcribed, the cost of such transcription shall be borne by the party or parties making the request unless the arbitrators direct otherwise. The arbitrators may also direct that the record be transcribed. If the record is transcribed at the request of any party, a copy shall be provided to the arbitrators.
(b) A verbatim record of mediation conducted pursuant to Part IV of this Code shall not be kept.

Sec. 38 through 42 No change.

Schedule of Fees for Customer Disputes

Sec. 43.

(a) through (h) No change.
(i) Each party to a matter submitted to a mediation administered by the Association where there is no Association arbitration proceeding pending shall pay an administrative fee of $150.
(j) The parties to a mediation administered by the Association shall pay all of the mediator's charges, including the mediator's travel and other expenses. The charges shall be specified in the Submission Agreement and shall be apportioned equally among the parties unless they agree otherwise. Each party shall deposit with the Association their proportional share of the anticipated mediator charges and expenses, as determined by the Director of Mediation, prior to the first mediation session. Mediator charges, except travel and other expenses, are as follows:
(1) Initial Mediation Session: $600 or four (4) times the mediator's hourly rate agreed to by the parties and the mediator; and
(2) Additional Mediation Sessions:$150 per hour, or such other hourly rate agreed to by the parties and the mediator.

Schedule of Fees for Industry and Clearing Controversies

Sec. 44.

(a) through (i) No change.
(j) Each party to a matter submitted to a mediation administered by the Association where there is no Association arbitration proceeding pending shall pay an administrative fee of $250.
(k) The parties to a mediation administered by the Association shall pay all of the mediator's charges, including the mediator's travel and other expenses. The charges shall be specified in the Submission Agreement and shall be apportioned equally among the parties unless they agree otherwise. Each party shall deposit with the Association their proportional share of the anticipated mediator charges and expenses, as determined by the Director of Mediation, prior to the first mediation session. Mediator charges, except travel and other expenses, are as follows:
(1) Initial Mediation Session: $600 or four (4) times the mediator's hourly rate agreed to by the parties and the mediator; and
(2) Additional Mediation Sessions:$150 per hour, or such other hourly rate agreed to by the parties and the mediator.

Sec. 45 and 46 No change.

Sec. 47. Reserved.

Sec. 48. Reserved.

Sec. 49. Reserved.

PART IV—MEDIATION RULES

Scope and Authority

Sec. 50.

(a) The NASD Mediation Procedures ("Procedures") set forth in this Part shall apply to the mediation of any dispute, claim or controversy ("matter") administered by the Association.
(b) A Director of Mediation shall be designated by the Association to administer mediations under these Procedures. The Director will consult the Association's National Arbitration Committee on the administration of mediations and the Committee shall, as necessary, make recommendations to the Director and recommend to the Board of Governors amendments to the Procedures. The duties and functions of the Director may be delegated by the Director, as appropriate. For purposes of this Part, the term "Director" refers to the Director of Mediation.
(c) Neither the NASD nor any mediator appointed to mediate a matter pursuant to these Procedures shall have any authority to compel a party to participate in a mediation or to settle a matter.

Submission of Eligible Matters

Sec. 51. Any matter eligible for arbitration under this Code, any part thereof, or any issue related to the matter, including procedural issues, may be submitted for mediation under these Procedures upon the agreement of all parties. A matter will be deemed submitted when the Director has received an executed Submission Agreement from each party. The Director shall have the sole authority to determine if a matter is eligible to be submitted for mediation.

Arbitration Proceedings

Sec. 52. Unless the parties agree otherwise, the submission of a matter for mediation shall not stay or otherwise delay the arbitration of a matter pending under this Code.

Mediator Selection

Sec. 53.

(a) A mediator may be selected: (1) by the parties from a list supplied by the Director; (2) by the parties from a list or other source of their own choosing; or (3) by the Director if the parties do not act to select a mediator after submitting a matter to mediation.
(b) With respect to any mediator assigned or selected from a list provided by the Association, the parties will be provided with information relating to the mediator's employment, education, and professional background, as well as information on the mediator's experience, training, and credentials as a mediator. Any mediator selected or assigned to mediate a matter shall comply with the provisions of Sections 23(a), (b) and (c) of the Code, unless, with respect to a mediator selected from a source other than the Association's lists, the parties elect to waive such disclosure.
(c) No mediator shall be permitted to serve as an arbitrator of any matter pending in NASD arbitration in which he served as a mediator, nor shall the mediator be permitted to represent any party or participant to the mediation in any subsequent NASD arbitration proceeding relating to the subject matter of the mediation.

Limitation on Liability

Sec. 54. The Association, its employees, and any mediator named to mediate a matter under this Part, shall not be liable for any act or omission in connection with a mediation administered pursuant to these Procedures.

Mediation Ground Rules

Sec. 55.

(a) The following Ground Rules are established to govern the mediation of a matter. The parties to a mediation may agree to amend any or all of the Ground Rules at any time. The Ground Rules are intended to be standards of conduct for the parties and the mediator.
(b) Mediation is voluntary and any party may withdraw from mediation at any time prior to the execution of a written settlement agreement by giving written notice of withdrawal to the mediator, the other parties, and the Director.
(c) The mediator shall act as a neutral, impartial facilitator of the mediation process and shall not have any authority to determine issues, make decisions or otherwise resolve the matter.
(d) Following the selection of a mediator, the mediator, all parties and their representatives will meet in person or by conference call for all mediation sessions, as determined by the mediator or by mutual agreement of the parties. The mediator shall facilitate, through joint sessions, caucuses and/or other means, discussions between the parties, with the goal of assisting the parties in reaching their own resolution of the matter. The mediator shall determine the procedure for the conduct of the mediation. The parties and their representatives agree to cooperate with the mediator in ensuring that the mediation is conducted expeditiously, to make all reasonable efforts to be available for mediation sessions, and to be represented at all scheduled mediation sessions either in person or through a person with authority to settle the matter.
(e) The mediator may meet with and communicate separately with each party or their representative. The mediator shall notify all other parties of any such separate meetings or other communications.
(f) The parties agree to attempt, in good faith, to negotiate a settlement of the matter submitted to mediation. Notwithstanding that a matter is being mediated, the parties may engage in direct settlement discussions and negotiations separate from the mediation process.
(g) Mediation is intended to be private and confidential. The parties and the mediator agree not to disclose, transmit, introduce, or otherwise use opinions, suggestions, proposals, offers, or admissions obtained or disclosed during the mediation by any party or the mediator as evidence in any action at law, or other proceeding, including a lawsuit or arbitration, unless authorized in writing by all other parties to the mediation or compelled by law, except that the fact that a mediation has occurred shall not be considered confidential.

Notwithstanding the foregoing, the parties agree and acknowledge that the provisions of this subsection shall not operate to shield from disclosure to the Association or any other regulatory authority, documentary or other information that the Association or other regulatory authority would be entitled to obtain or examine in the exercise of its regulatory responsibilities.

The mediator will not transmit or otherwise disclose confidential information provided by one party to any other party unless authorized to do so by the party providing the confidential information.

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